June update: More patience required this time

Angus Coote

History does not repeat, but it can often rhyme. At the time of writing six retail UK property funds with $18 billion of assets have been frozen to investors sighting ‘’exceptional illiquidity.’’ These fund providers are all household names in the UK. Standard Life, Aviva, Aberdeen Asset Management, Henderson, Threadneedle and Canada Life now have financial products seized shut by market liquidity vanishing just like that. In 2008, Bear Sterns froze two subprime funds (Bear Sterns ultimately failed) in what is often described as the prelude to the GFC, sparking contagion fears around all markets. The 2nd and 3rd round implications from BREXIT continue to playout, and it is too early to know if this will morph further towards a full-blown crisis, or be contained and perhaps another buying opportunity for quality assets. We believe more patience is required with this scare then previous market wobbles in August 2015 and Jan 2016.

As it stands today, the UK remains leaderless in all three major political parties, a total vacuum. It is the first sovereign ever to be double downgraded from AAA to AA (usually go to AA+ first), and its GBP currency has suffered a peak to trough depreciation of 15% so far. Spare a thought for any businesses with USD debts but GBP revenues. Two weeks on from the vote we are no closer to understanding how BREXIT will work, what timeframes are required or who will lead the complex negotiations with Brussels. This situation requires heightened monitoring and will continue to dominate investor sentiment.

Unfortunately, BREXIT has let the volatility genie out of the bottle. The ripples of such large moves in GBP currency markets will not remain contained. Central banks have used policy to fight poor fundamentals and dampen volatility since the GFC, however, this is different. After the one-off shock of BREXIT, we are now left with a number of continuing unknowns which cannot be easily dampened. In our last two monthly’s updates, we have advised investors that ‘’we have concerns about macro events coming up, but well-diversified portfolios will continue to perform in all scenarios. If you don’t have a balance of growth, income, defensives and liquidity then you could be in for a bumpy ride.’’ The bumps maybe just beginning. Good planning and process and asset allocation will be critical to holding investors in good stead.

Crisis management follows an obvious playbook. The better prepared and cooler the head, the better the financial outcomes. Keep calm and carry on trading perhaps? Volatility produces wonderful opportunities to both buy and sell assets, but investors must have a plan and stick to the script as these opportunities present themselves. Today’s bid can be tomorrows offer very quickly and vice versa. High-quality assets may be dragged cheap making for good buying, low quality will be dragged down and may not recover. Liquidity management remains paramount, leverage, margin loans or high debt burdens need careful consideration as margin requirements can be increased or loans called at short notice.

In the aftermath of the BREXIT vote Jamieson Coote Bonds hosted a brief 30-minute conference call for investors to utilise the collective financial experience of the founders and advisory board members Saul Eslake and Mark Burgess, to discuss the opportunities and risks presented by such a shock vote. A recording of the call is still available on 1800 154 669; please use passcode 2386 78009.

Fund Highlights and Positioning

Jamieson Coote Bonds Active Fund returned 1.46% (gross) in June. The fund initially performed well early in the month, however, market sentiment turned toward the REMAIN camp of BREXIT and bonds sold off mid-month in expectation of this event risk passing without issue. We had been underweight duration during the sell-off but thankfully we managed to add duration to the portfolio the day of the vote as we believed the drivers of bond performance this year still held in 1. A disinflationary environment forcing the RBA to cut rates and 2. Negative global bond yields would hold Australian bond valuations in a REMAIN vote.

After catching the explosive rally on vote day we believed the price action to be exhaustive, and we sold long-dated bonds to de-risk the portfolio and lock in significant performance for investors. Usually, these spike high events generate reliable future price indicators, however, on this occasion the market continued to rally in the days thereafter leading to some slight underperformance vs. index during the month. We retain a ten year vs 20-year flattening position and remain overweight the front end of the curve in expectation of further RBA rate cuts in August. Spread positions remained very short dated in AAA names only. The JCB Active fund will be distributing 1.00% of net asset value (NAV) at 30th June close in accordance with our semi-annual distribution policy. Unit prices will be adjusted lower as a result of the distribution.

Jamieson Coote Bonds Active Fund has performed at a monthly run rate of +58 bps (gross) since inception for a return of 11.13% (gross) running a portfolio of AAA and AA rated Government Bonds. The largest draw down in any month has been -62bps.

Original article taken from Jamieson Coote Bonds website: (VIEW LINK)


Angus Coote

Angus established Jamieson Coote Bonds with Charlie Jamieson in 2014. He started his career with JPMorgan in London, before working at ANZ and Westpac, where he transacted the first ever Australian Bond trades for several large Asian Central Banks.

Expertise

bonds macroeconomics Longform jamieson coote bonds brexit

Comments

Please sign in to comment on this wire.